A High-Wire Act Looms for Australia’s Central Bank

  • Lowe faces prospect of first rate-hike since 2010 next year
  • Housing cooling as high debt, low wages remain key concern
Mizuho Bank’s Vishnu Varathan discusses the outlook for Australia’s economy and RBA policy.

Having subdued Australia’s housing market frenzy, Governor Philip Lowe now has to steer his way through the hangover.

Despite being saddled with record household debt and wretched wages growth, Australia’s economy is showing signs of picking up steam, with hiring on a tear and firms investing. The dual narratives have prompted the central bank to sit still on record-low interest rates for 16 months, and now present Lowe with a dilemma for 2018: gauging just when the economy can handle a hike.

“The challenge is not to jump immediately from mission accomplished in housing into the next tightening cycle,” said Daniel Blake, an interest-rate strategist at Morgan Stanley in Sydney. “You want to see how this cooling housing market affects consumption spending, because some have ridden the asset-price growth and taken advantage of that, and others have followed in with a lot of leverage.”

Read more: Australia’s housing hangover is twice size of U.S. subprime

The timing of the first rate rise since 2010 is in dispute: Goldman Sachs Group Inc.’s prediction for May tops the hawks, while Westpac Banking Corp.’s 2020 call leads the doves. Markets, meanwhile, are honing in on the fourth quarter of next year.

Lowe said late last month that spare capacity in the economy and a subdued inflation outlook meant there wasn’t a strong case “for a near-term adjustment” in monetary policy.

Part of the reason for slack -- despite record full-time hiring -- is Australia’s booming population growth. The mix of migration-driven demand, a lack of homes and former RBA Governor Glenn Stevens’s easing cycle that slashed rates from 4.75 percent in 2011 to 1.5 percent last year, has also fueled a housing bonanza. Property prices in Sydney almost doubled in that period.

Stevens did manage to prevent the economy slumping amid the unwinding of a mining investment boom; he also helped the transition for former miners to find work in construction, keeping a lid on unemployment. As a result, Australia’s economy has now expanded for more than 26 years.

After taking over in 2016, Lowe made it clear he wasn’t cutting further, even if weak consumer prices weakened. He said easing wasn’t in the national interest -- which economists interpreted as code for further inflating a housing bubble. That, together with regulatory measures, finally halted Sydney’s price surge and slowed Melbourne’s. 

Disaster averted. But the legacy of Stevens’s easing cycle remains: household debt is a record 194 percent of income. That’s forced consumers to raid the piggy bank to spend, with the savings ratio now around a third of 2011 levels. The risk is that Australians decide to slash consumption -- more than half of gross domestic product -- to control their debts.

And then there’s China. It’s also facing a balancing act as policy makers try to encourage corporate deleveraging and a move to more sustainable growth. Given Australia is the most China-dependent economy in the developed world, shudders from the mainland would reverberate heavily Down Under.

“If we are speculating on the most significant ‘unknown’ for 2018 and 2019, the Chinese financial system, particularly for Australia, stands above any other issues that should be worrying us,” said Westpac economist Bill Evans.

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